Archive for January 28th, 2009

Investment vs. Consumption

(I’ve been fighting off stomach flu and a cold, so I haven’t blogged the last couple days and this’ll be short…only slept a couple hours last night…)

There is a lot of criticism of the Obama stimulus plan for not providing money right now to stimulate the economy.  Instead, much of the money won’t be spent until 2010 and 2011.  Some think this is a sign of some ominous plot or alterior motive.  Afterall, if stimulus is what he wants, shouldn’t he spend the money earlier?

To me, this is precisely what the stimulus package needs to do.   We do not need a stimulus package that is focused on consumption.  Dumping a lot of quick and easy  money now into the economy so people can go buy more goods would create a short uptick, but it would be just more consumption based on debt, more living beyond our means.  When that money is spent, we’ll be back where we were, but perhaps now with inflation alongside a recession.

The Obama plan seems to focus on investing in infrastructure and setting up the framework for what we really need: a retooling of our economy and a move towards renewed production, and less consumption/speculation.  To be sure, the talk of pork, pseudo-ear marks, and Congress dirtying their hands to get a bunch of pet projects included is not good news.

So in theory the Obama approach sounds good — don’t go for the short term consumption fix, but the longer term approach of setting our economy up for new productive capacity.  In practice, we’ll have to wait and see.  If it works right the increase in infrastructure will have a short term, targeted impact on the economy which can go along with a growth in production.  That could start to lift us out of this.    But it’ll take years.